FedEx Ground is ‘crown jewel' of empire

Saturday

Feb 9, 2013 at 10:19 PM

Local officials have touted Ocala's central location and access to major highways as a reason FedEx Ground Package System Inc. might create a distribution hub here and sink $122.9 million into a building and equipment.

By Susan Latham CarrStaff writer

Local officials have touted Ocala's central location and access to major highways as a reason FedEx Ground Package System Inc. might create a distribution hub here and sink $122.9 million into a building and equipment.

The company confirms that.

“When selecting a site, we are diligent in researching its ease of access to major highways, its proximity to customers' distribution centers and a strong local community workforce for recruiting employees,” Jesse Bull, FedEx Ground communications coordinator, wrote in an email to the Star-Banner.

“We recognize that our impact is greater than the services we provide, and it is important to be a true part of the community.”

Parent company FedEx Corp.'s second-quarter figures provide even more insight into why the network expansion plans — of which Ocala might play a part — are so important.

For the second quarter ending Nov. 30, FedEx Corp. saw its profit drop 12 percent to $438 million, down from $497 million a year ago. That was due in part to Hurricane Sandy, but also because airfreight customers are looking for cheaper ways to ship.

At the same time, ground shipping revenue for the quarter rose 11 percent to $2.59 billion, its operating profit was up 3.5 percent and average daily volume grew 8 percent.

“There has been more a focus to grow out the ground network,” said Logan Purk, an analyst with Edward Jones in St. Louis. “I would argue it's now the crown jewel of the company.”

Purk said ground has the best margins and returns.

“At the end of the day, ground is driving a lot of that growth and margin improvement,” he said.

The reasons: In the current economic climate, customers are willing to wait longer for a package to be delivered in exchange for a lower price. And internationally, rather than using air, customers are moving to shipping by boat, when possible, to save money.

Airfreight is a more expensive service that earns the company more money. But customers are finding less expensive ways to ship, which is cutting into those air profits.

“When the economy comes back, some of that will get better, but some of that is here to stay,” said Jim Corridore, logistics equity analyst with S&P Capital IQ. “Shipping patterns throughout the world are changing.”

He said FedEx and UPS' longer delivery options are becoming so reliable that customers will not return to one-day shipments.

As a result, Corridore said, FedEx is “redeploying assets” and redesigning networks to increase speed and cut costs.

Meanwhile, ground shipping is growing.

“They are looking to expand that business, and I would expect them to grow on the ground side over the next few years,” Corridore said. “International package volumes have been weaker.”

He said that as ground becomes a larger part of FedEx's business it will need to expand and create new hubs in many parts of the country.

Local officials hope Ocala is home to one of those hubs.

Last week, the Ocala City Council and the County Commission approved an agreement to offer FedEx Ground Package System a combined $3.47 million in incentives to encourage the company to build a 383,161-square-foot package distribution hub here, bringing 165 much-needed jobs to the area.

Besides the jobs and capital investment, having a company of FedEx's caliber is viewed as a catalyst for other economic development opportunities.

There are still a few hoops that have to be jumped through before the deal is solidified. The company must close on 150 acres at the Ocala/Marion County Commerce Park east of Interstate 75 and north of U.S. 27. The property, formerly known as the Magna property, is owned by Bill Kearns' Ocala 489 LLC.

Besides the land deal, the state still must sign off on its $792,000 share of Qualified Target Industry grant incentives.

Corporate culture

Purk said the company's leadership has been stable. And Corridore said it has won many awards as a good employer.

But he pointed out that the company uses a lot of part-time employees and college students, and the jobs that move the packages in and out tend to be shift work.

Still, he said there will be jobs for truck drivers, delivery employees and forklift operators.

The company has had its legal scuffles. According to the Pittsburgh Tribune-Review, the Ground unit has had challenges from independent contractors who deliver packages; they claim they should be employees because they were controlled by the company.

Now the contractors operate multiple routes, and they must incorporate as a small business and treat drivers as employees, with workers' compensation and unemployment insurance.

A route can cost $20,000 and more depending on logistics. Contractors are paid by the mile and package.

“I don't think the lawsuits are a major issue,” Purk said. “A lot of it they have gotten past.”

Ground was charged with discriminating against 21,365 job seekers at 24 facilities in 15 states, according to The New York Times. The company paid $3 million but admitted no wrongdoing. Of the 21,365 rejected applicants, 61 percent were female, 52 percent African-American, 14 percent Hispanic, 2 percent Asian and 1 percent Native American.

Should the deal come to fruition in Ocala, the site selected lies within the Enterprise Zone, an economically depressed area targeted for economic development. When companies locate in the area they are eligible for certain tax credits.

FedEx Ground has told the city it will make a “good faith” effort to hire people who live in the Enterprise Zone. The people who live in that area are largely African-American.

The Wall Street Journal reported in December that a suit was filed more than a year before alleging that FedEx had been charging companies higher residential surcharges. According to the Journal, a company spokesperson wrote that the company will continue to defend the allegations in court.

FedEx Ground, with headquarters in Moon Township in Pittsburgh, offers small package ground delivery services, including day-certain service throughout the U.S. and Canada, as well as residential delivery to nearly all U.S. residences through its FedEx Home Delivery Service.

FedEx Ground is the company's second-largest operating unit: As reported in its May 31, 2012, 10-K, FedEx Ground had a staff of about 50,500.

The company relies on independent contractors to carry out its pickup-and-delivery operation. Its primary competitors are United Parcel Service Inc. and the U.S. Postal Service.

FedEx is the second-largest package delivery company in the world behind UPS.

FedEx said its Ground operating income is expected to continue growing this year because of volume and yield increase, as well as automation of the preload, pickup and delivery process and installation of GPS devices on all trailers and dollies.

Capital spending in 2013 is expected to increase because of hub expansions and vehicle and equipment purchases.

The company announced in November that it was increasing FedEx Ground shipping rates by a net average of 4.9 percent on Jan. 7.

FedEx Corp.

FedEx Corp., the parent company of FedEx Ground Package System Inc. and three other business segments, was founded as an air shipping company in 1971 by Chairman, President and Chief Executive Officer Frederick W. Smith.

The company originally was called FDX Corp. FedEx Corp. was formed in 1998 when Caliber System Inc. was bought. Today FedEx, based in Memphis, is a $42 billion Fortune 100 global company.

According to its website, the company operates 33 ground hubs and more than 500 pickup/delivery stations and 25 FedEx Smart Post distribution centers. There are 650 FedEx World Service Centers, 1,750 FedEx office locations, and 6,300 FedEx authorized ship centers and alliance partners.

FedEx is watched very closely by analysts because, based on the variety of goods that it ships, it is considered a barometer of how the overall economy is faring.

FedEx trades as FDX on the New York Stock Exchange. On Friday, FedEx closed at $106.41, down 57 cents.